1. Multinational Policymaking The International Financial Architecture

2. Daniels and VanHooseMultinational Policymaking2 International Financial Architecture The international financial architecture is the institutions, governmental and non-government organizations, and the policies that govern activity in the international monetary and financial markets. Since the collapse of the Bretton Woods system that most important aspect of the international financial system is the growth of capital flows among nations.

3. Daniels and VanHooseMultinational Policymaking3 Capital Market Liberalization Advocates of liberalized capital flows argue that unhindered capital flows allow savings to flow to their most productive use, resulting in the development of real resources and higher productivity. Financial market imperfections, such as those discussed in chapter 7 may result in capital misallocations and financial instability.

4. Daniels and VanHooseMultinational Policymaking4 Financial Instability and Financial Crisis Financial instability is when market imperfections and policy created distortions result in a situation in which the financial sector is unable to allocate funds to their most productive use. A financial crisis is a situation where a nation’s financial system is no longer able to function. A crisis typically involves a banking crisis, and currency crisis, and a foreign debt crisis.

5. Daniels and VanHooseMultinational Policymaking5 Capital Flows and Financial Crisis International capitals flows consists of short-term or portfolio capital flows, and long-term or foreign direct investment flows. An excessive reliance on portfolio capital can be destabilizing and may contribute to financial crises.

6. Daniels and VanHooseMultinational Policymaking6 Multilateral Policymaking The two organizations at the center of efforts to stem international financial crises are: The International Monetary Fund: a multinational organization the promotes international monetary policy cooperation, exchange arrangements, and economic growth. The World Bank: A sister institution that specializes in making loans to developing nations to promote development and growth.

7. Daniels and VanHooseMultinational Policymaking7 Can these Organizations Predict a Crisis? To predict a crisis, policymakers must have an idea of their cause. Potential sources of financial crisis are: An inconsistency between the exchange rate and economic fundamentals. Speculative attacks. Structural moral hazards.

8. Daniels and VanHooseMultinational Policymaking8 Indicators and Warning Systems These perspective on financial crisis led to the development of crisis indication and warning systems. A financial crisis indicator is a variable that moves in a specific direction prior to a financial crisis. An early warning system is a mechanism that multinational institutions might use to track financial crisis, thereby warning of future crises.